Safeway 3Q profit drops 35 percent on slow sales

PORTLAND, Ore. — Safeway Inc. said Thursday that falling prices and frugal shoppers drove its third-quarter profit down 35 percent.

Despite the squeeze, the profit topped Wall Street expectations and sent shares up sharply in trading Thursday.

Safeway recently began lowering prices on some key items at its grocery stores to draw today’s cost-concious shopper. The move, while enacted later than some of its competitors, seems to have paid off as more shoppers came to its stores and with greater frequency during the quarter.

But Safeway’s profitability suffered as consumers continued to limit their spending and buy items at lower prices than normal.

Safeway said prices for meat, produce and dairy — which hit highs last year — continue to fall. That’s on top of prices for lower gasoline prices compared with last year.

As a result, the company reported that it earned $128.8 million, or 31 cents per share for the quarter, down from $199.7 million, or 46 cents per share, a year earlier.

Revenue declined 7 percent to $9.46 billion.

Analysts polled by Thomson Reuters expected earnings per share of 29 cents in earnings on revenue of $9.46 billion.

Safeway CEO Steve Burd, however, said the company is encouraged that sales volume and shopper trends continue to improve and will continue to push prices lower.

He also noted that while shoppers remain focused on low prices and keep spending tight, they are showing some early signs of relaxing their frugal ways — such as trading back up to lattes from coffee.

“That suggests to me that we’re at or near the bottom of this whole thing, and that would be good for all of us if that’s true,” Burd said.

Grocers were once the standout industry in the recession as consumers kept spending to essentials. But as the recession dragged on, shoppers cut spending even on essentials, looking for cheaper store brands.

Companies like Kroger Co. and Wal-Mart Stores Inc., which were seen as low-price leaders, quickly outperformed competitors.

Safeway has struggled to catch up on pricing but said Thursday it is not trying to fashion itself as an everyday-low-price store but to be competitive on the items shoppers buy most often.

Standard & Poor’s Equity Research analyst Joseph Agnesse reiterated a “Sell” rating on shares of Safeway, saying it is hard to forecast when food prices may recover, which is critical to improving Safeway’s profit.

He lowered estimates for the company’s earnings per share by 5 cents to $1.75 in 2009 and $1.95 in 2010.

The company reaffirmed its profit outlook for the year, saying it saying it expects to earn between $1.70 and $1.90 per share but deflation will continue to be a key pressure moving forward. Analysts anticipate earnings of $1.73 per share.

Shares of Safeway, which is based in Pleasanton, Calif., rose $1.04, or nearly 5 percent, to $22.47 by early afternoon trading.

AP Retail Writer Betsy Vereckey contributed to this report.